Conference Board Confirms Consumer Relapse

The consumer needs Prozac® – she/he is depressed and suffering from a relapse into a difficult mental state. The latest Conference Board Consumer Confidence Index was released this morning based on data collected through March 16. The 63.4 reading was lower than the consensus estimate of 65.0, reported by Briefing.com and a dramatic nose dive from the February upward revision of 72.0. Here is an excerpt from the Conference Board report.

Says Lynn Franco, Director of The Conference Board Consumer Research Center: “The sharp decline in confidence was prompted by a sharp decline in expectations. Consumers’ inflation expectations rose significantly in March and their income expectations soured, a combination that will likely impact spending decisions. On the other hand, consumers’ assessment of current conditions improved, indicating that while the short-term future may be uncertain, the economy continues to expand.”Consumers’ assessment of current conditions improved in March. Those claiming business conditions are “good” increased to 15.1 percent from 12.4 percent, while those claiming business conditions are “bad” decreased to 37.0 percent from 39.3 percent. Consumers’ appraisal of the job market, however, was slightly less favorable than in February. Those saying jobs are “hard to get” edged up to 44.6 percent from 44.4 percent, while those stating jobs are “plentiful” dipped to 4.4 percent from 4.9 percent.Consumers’ short-term outlook was considerably less favorable than in February. The proportion of consumers expecting business conditions to improve over the next six months declined to 20.6 percent from 25.2 percent, while those anticipating business conditions will worsen increased to 16.2 percent from 10.3 percent. Consumers were also more downbeat about the labor market. Those expecting more jobs in the months ahead declined to 19.9 percent from 21.2 percent, while those anticipating fewer jobs rose to 20.7 percent from 15.0 percent. The proportion of consumers expecting an increase in their incomes declined to 15.3 percent from 17.4 percent. More…

The Sobering Historical Context

Let’s take a step back and put Lynn Franco’s interpretation in a larger perspective. The table here shows the average consumer confidence levels for each of the five recessions during the history of this data series, which dates from June 1977. The latest number is well above the bottom of the unprecedented trough in 2008, but it is below the average confidence level of recessions a full 21 months after the end of the Great Recession (based on the official call of the National Bureau of Economic Research).

The chart below is another attempt to evaluate the historical context for this index as a coincident indicator of the economy. Toward this end I have highlighted recessions and included GDP. The linear regression through the index data shows the long-term trend and highlights the extreme volatility of this indicator. Statisticians may assign little significance to a regression through this sort of data. But the slope clearly resembles the regression trend for real GDP shown below, and it is probably a more revealing indicator of relative confidence than the 1985 level of 100 that the Conference Board cites as a point of reference. Today’s reading of 63.4 is significantly below the 84.7 of the current regression level (25.1% below, to be precise).

It is interesting that the consumer confidence pattern of the past 18 months following the NBER declared end to the recession is similar to the 36-month pattern following the 1990-1991 recession, although the current pattern has so far been at a lower confidence level. At an even higher level, there was also a two year period following the 2001 recession where confidence lagged. The common factor in all three cases is a “jobless recovery”. Consumer Confidence might appear to be a proxy for unemployment problems.

However, John Lounsbury has created a series of graphs that indicate there are major differences in the behavior of consumer confidence during and following each of the five most recent recessions, even the 1991-1992 event. These are presented below, followed by some comments that John has provided.

Lounsbury Figure 1

Lounsbury Figure 2

Lounsbury Figure 3

Lounsbury Figure 4

Here are some comments provided by John Lounsbury:

These four graphs are somewhat redundant but each shows a slightly different aspect of the data.

Figure 1 shows how extraordinary consumer sentiment was during the 2001 recession. This was perhaps influenced by the togetherness and sense of rallying to the bosom of the nation that followed the 9/11 attacks.

Figure 2 shows the relatively deep depression of confidence during the 2007-2009 recession, even compared to the severe recession of 1981-1982.

Figure 2 shows the relatively deep depression of confidence in the 21 months following the official end of the recession of 2007-2009. It is particularly of note that only two of the three so-called “jobless recoveries” show low consumer confidence. Again, there may be a national rallying sentiment from 9/11 still having an effect in 2002 -2003.

Note that there is little difference in the consumer sentiment for the recovery from the 1980 recession when we include the first nine months of the next recession.

Figure 3 displays the consumer sentiment numbers during and following the last five recessions. The differences for the averages for all five recessions and recoveries are plotted. Again the outlier nature of consumer sentiment associated with the 2001 recession and recovery are clear.

Also Figure 3 shows the 2007-2009 recession and recovery periods are the only pair for the five recessions that are both below the averages – and each is below by a large multiple compared to the other four recessions/recoveries.

Figure 4 shows the data from Figure 3 with a different organization, where consumer confidence is averaged over all the months of each recession plus the first 21 month following the end of the recession. Figure 4 does nothing more than emphasize the same observations noted for Figure 3. The Great Recession is aptly named with respect to its impact on the psyche of the consumer.

On a percentile basis, the latest reading is at the 17th percentile of all the monthly readings since the start of this data series in June 1977 and at the 11th percentile of all the non-recessionary months.

For a confirming perspective on consumer attitudes, see my post on the similar cliff-dive in the most recent Reuters/University of Michigan Consumer Sentiment Index. Here is the chart from that post.

And finally, let’s take a look at the correlation between consumer confidence and small business sentiment, the latter by way of the National Federation of Independent Business (NFIB) Small Business Optimism Index. As the chart illustrates, the two have been closely correlated since the onset of the Financial Crisis.

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